Fewer U.S.-based multinational companies are investing in Canada since it formed the North American Free Trade Agreement with the United States and Mexico in 1994, according to Professor Walid Hejazi and Professor Emeritus A.E. Safarian of the Joseph L. Rotman School of Management.

“U.S. multinationals no longer need to locate in Canada to access its market,” says Hejazi, who also teaches in the division of management at UTSC. “In the past, foreign multinational enterprises would locate in this country to avoid paying tariffs. Now that there is free trade within North America, these companies can locate near wealthier and more productive environments in America and simply export to Canada.”

Hejazi and Safarian compared the gross domestic product of the U.S. with 52 countries from 1970 to 2002. They also looked at the amount of foreign direct investment in these countries over the same period. The findings showed that Canada only receives 10 per cent of U.S. foreign investment whereas Europe receives more than half. This contrasts sharply to 40 years ago when Canada received the same amount of U.S. foreign investment as Europe.

“The answer to this foreign direct investment dilemma is to improve Canada’s productivity performance and its investment environment,” says Hejazi. “This is a difficult challenge, and one that has received the attention of both policy-makers and academics.”

Reader Comments

Professors Hejazi and Safarian appear to assume that foreign direct investment (FDI) is a homogeneous thing and that it is always good for Canada. While some studies point up the virtues of FDI, I have yet to see a serious effort by scholars to distinguish between foreign investment in new businesses in Canada and the foreign acquisition of existing Canadian businesses. The latter represent over 90 per cent of all foreign direct investment since the arrival of free trade. Why do economists assume that this is a benefit to Canada? Ever since we signed the first free trade agreement, Canada has lost head offices and all the economic activity that surrounds them. This was not the result of tariff reductions; tariffs were already quite low before “free trade.”

We are losing head offices because we changed laws that required multinationals to locate here in order to do business here. Not only does the NAFTA guarantee U.S. companies the right to repatriate all of their profits, it commits Canada to give up the tools it previously used to make sure that foreign direct investment was a benefit to us. For example, requiring the foreign investor to hire staff locally is illegal under the NAFTA.

Simply assuming that foreign direct investment is good and should be encouraged leaves many pertinent questions unanswered. If economists are going to be helpful to policy makers, they must re-examine these anecdotal assumptions and confront the real issues.

Congratulations to the four poetry finalists! We invite you to read them all and vote on your favourite. Our judging panel will choose the grand prize winner, though. Short story finalists will be announced in September.